Bailout for Portugal Will Put Politicians in a Vise

Lisbon - To secure a bailout worth about €80 billion, Portugal may have to agree to international creditors’ demands that it impose tougher austerity measures than those its own lawmakers rejected less than a month ago.

This paradoxical situation is fueling divisions in Lisbon before a June 5 general election that was itself called because of a parliamentary standoff over how to clean up the public finances. In fact, Portuguese politicians may be more concerned about not getting blamed by voters for seeking outside help than about negotiating favorable terms for that rescue, valued at $116 billion.

“For the first time in three generations, the Portuguese are being forced to accept that they may find themselves worse off than their parents, and that is a huge shock for which nobody wants to take the blame,” said Miguel Morgado, a political science professor at the Catholic University of Portugal.

But officials from the European Union, the International Monetary Fund and the European Central Bank — expected to arrive Tuesday in Lisbon — will want to ensure that bailout conditions remain binding whatever the outcome of the June 5 vote. With that in mind, Olli Rehn, the European commissioner in charge of economic and monetary affairs, said last week that “a cross-party agreement” needed to be negotiated by mid-May, led by the caretaker Socialist government of Prime Minister José Sócrates but also involving opposition parties.

So far, the Portuguese response has been discordant.

Fernando Teixeira dos Santos, Portugal’s finance minister, said that “it is not for the government to negotiate with the opposition.”

Pedro Passos Coelho, the head of the main opposition Social Democratic Party, who will challenge Mr. Sócrates in June and is leading in opinion polls, backed the government’s call for a rescue, but called for any bailout package to be “minimal.”

International creditors will also be met in Lisbon with deep suspicion that a bailout, while necessary to meet Portugal’s immediate refinancing obligations, might not guarantee longer-term financial security. That fear has been fueled by the examples of Greece and Ireland, whose financing situation remains precarious even after securing last year €110 billion and €85 billion, respectively, in assistance.

“The chances of Greece not having to restructure its debt are not much higher than a year ago and that is something that our negotiators must keep in mind when discussing what interest rates are appropriate,” said António Nogueira Leite, a senior economic adviser to the Social Democratic Party.

While Portugal will be negotiating its rescue from a position of weakness, its European partners should also realize that “if the burden is not shared fairly in this third bailout, there is a genuine risk that resentment will poison the whole European project,” said Rui Ramos, a political analyst and professor of political history at the University of Lisbon.

“Germany and others must recognize that the problems of Southern European countries like Portugal are also due to excessive lending by their own banks,” he added.

When Portugal last called upon international assistance, in 1983, it was able to couple I.M.F. aid with a currency devaluation that resulted in an export-led recovery. That is no longer an option since the country adopted the euro.

In fact, the bailout negotiations come as Portugal faces another recession, with its central bank forecasting that the economy will contract 1.3 percent this year. Its public debt is expected to rise to almost 100 percent of gross domestic product this year from 60 percent five years ago.

Furthermore, Portugal recently revised its 2010 budget deficit — to 8.6 percent of G.D.P., rather than 7.3 percent — under stricter guidelines from Brussels about accounting at state-owned companies.

Some economists say they worry that Portugal’s difficulties will be harder to address than those of Greece or Ireland, where specific errors precipitated the crisis. Greece admitted to misstating public accounts while the Irish government guaranteed the debts of the country’s banks, which took huge write-downs on real estate loans.

“It will take many years to get Portugal’s economy back on track even with a bailout, because the aim of such a bailout is to ensure that we repay our debts rather than solve our structural problems,” said Vasco d’Orey, an independent economist.

Among such structural problems are outdated housing regulations that have driven Portuguese to buy rather than rent, as well as rigid labor market rules that have helped push the unemployment rate to 11.2 percent from 4 percent a decade ago.

Portugal’s economy has also remained heavily reliant on state financing, even in public infrastructure works that involved private sector operators.

The guarantees that such private operators have received amount to “keeping a system based on the principle that the state should cover all risks, whatever the costs,” said Duarte Schmidt Lino, a lawyer at PMLJ in Lisbon.

Portugal has recently tried to redirect investment to sectors like renewable energies. But Mr. Nogueira Leite, who is also a board member of Brisa, Portugal’s leading toll-road operator, estimated that, over the past 15 years, “75 percent of credit has been in some way linked to concrete and the building sector, and that is something that needs radical changing.”

Portugal, for instance, has the highest density of highways in Western Europe, he said, “which is clearly unreasonable, to use a mild term.”

Among the rare bright spots is a recent improvement in Portugal’s trade balance, with goods exports rising 15.7 percent in nominal terms last year.

Portuguese companies have also invested heavily in emerging markets, including former colonies like Angola.

An international rescue, however, could heighten protectionist concerns.

Last year, the Portuguese government unsuccessfully tried to block, on grounds of national interest, the sale by Portugal Telecom of its stake in Vivo, a Brazilian wireless business, to Telefónica of Spain.

“The Portuguese companies have debt levels that leave them very vulnerable to acquisitions on the cheap,” said Diogo Ortigão Ramos, a partner at the law firm Cuatrecasas, Gonçalves Pereira.

Mr. Rehn, the European commissioner, argued that privatizations should feature prominently in any Portuguese rescue. The government of Mr. Sócrates already pledged to divest the state of €6 billion in assets by 2013. State holdings range from transport companies like the national railways and TAP, the flagship airline, to financial institutions like Caixa Seguros.

One of the challenges for bailout negotiators will be to determine what proportion of the rescue should be channeled to banks. Analysts estimate that Portuguese banks need €10 billion in fresh capital. As Barclays Capital noted last week, in Portugal — and unlike in Ireland — “banks did not originate this crisis,” having avoided the subprime investments that set off the worldwide financial crisis.

Portuguese banks also did not finance a housing boom like that of Spain, given that Portugal’s economy averaged growth of 1.1 percent in the years before the crisis. Furthermore, domestic public debt represents 3.4 percent of banking assets, compared with an average of 5 percent across the European banking sector, according to research by BPI, a Portuguese bank.

But Portugal’s worsening debt situation and the recent collapse in its credit ratings could spell more trouble for the banks, in a country where corporate indebtedness has reached about 155 percent of G.D.P.

In addition, “this is an environment in which we should expect some capital flight, which will hurt the banks,” said Pedro Santos Guerreiro, editor in chief of Jornal de Negócios, a Portuguese business newspaper.

Since the start of this year, clients have withdrawn €468 million from funds managed by Portuguese investment companies, according to figures released last week by the industry.

Punitive bailout terms could also spur social unrest. José Almada, a 65-year-old retired welder who was attending a weekend rally of the Portuguese Communist Party, said that “workers need to fight against allowing the E.U. to help only their bankers.”

Portugal’s economy was transformed by huge subsidies after it joined the European Union in 1986.

“Nobody questions such benefits, but I also think that we sadly created here an environment where investing and working became less attractive options than relying on subsidies and borrowing,” said Mr. Ramos, the political historian.

Bailout for Portugal Will Put Politicians in a Vise

Lisbon - To secure a bailout worth about €80 billion, Portugal may have to agree to international creditors’ demands that it impose tougher austerity measures than those its own lawmakers rejected less than a month ago.

This paradoxical situation is fueling divisions in Lisbon before a June 5 general election that was itself called because of a parliamentary standoff over how to clean up the public finances. In fact, Portuguese politicians may be more concerned about not getting blamed by voters for seeking outside help than about negotiating favorable terms for that rescue, valued at $116 billion.

“For the first time in three generations, the Portuguese are being forced to accept that they may find themselves worse off than their parents, and that is a huge shock for which nobody wants to take the blame,” said Miguel Morgado, a political science professor at the Catholic University of Portugal.

But officials from the European Union, the International Monetary Fund and the European Central Bank — expected to arrive Tuesday in Lisbon — will want to ensure that bailout conditions remain binding whatever the outcome of the June 5 vote. With that in mind, Olli Rehn, the European commissioner in charge of economic and monetary affairs, said last week that “a cross-party agreement” needed to be negotiated by mid-May, led by the caretaker Socialist government of Prime Minister José Sócrates but also involving opposition parties.

So far, the Portuguese response has been discordant.

Fernando Teixeira dos Santos, Portugal’s finance minister, said that “it is not for the government to negotiate with the opposition.”

Pedro Passos Coelho, the head of the main opposition Social Democratic Party, who will challenge Mr. Sócrates in June and is leading in opinion polls, backed the government’s call for a rescue, but called for any bailout package to be “minimal.”

International creditors will also be met in Lisbon with deep suspicion that a bailout, while necessary to meet Portugal’s immediate refinancing obligations, might not guarantee longer-term financial security. That fear has been fueled by the examples of Greece and Ireland, whose financing situation remains precarious even after securing last year €110 billion and €85 billion, respectively, in assistance.

“The chances of Greece not having to restructure its debt are not much higher than a year ago and that is something that our negotiators must keep in mind when discussing what interest rates are appropriate,” said António Nogueira Leite, a senior economic adviser to the Social Democratic Party.

While Portugal will be negotiating its rescue from a position of weakness, its European partners should also realize that “if the burden is not shared fairly in this third bailout, there is a genuine risk that resentment will poison the whole European project,” said Rui Ramos, a political analyst and professor of political history at the University of Lisbon.

“Germany and others must recognize that the problems of Southern European countries like Portugal are also due to excessive lending by their own banks,” he added.

When Portugal last called upon international assistance, in 1983, it was able to couple I.M.F. aid with a currency devaluation that resulted in an export-led recovery. That is no longer an option since the country adopted the euro.

In fact, the bailout negotiations come as Portugal faces another recession, with its central bank forecasting that the economy will contract 1.3 percent this year. Its public debt is expected to rise to almost 100 percent of gross domestic product this year from 60 percent five years ago.

Furthermore, Portugal recently revised its 2010 budget deficit — to 8.6 percent of G.D.P., rather than 7.3 percent — under stricter guidelines from Brussels about accounting at state-owned companies.

Some economists say they worry that Portugal’s difficulties will be harder to address than those of Greece or Ireland, where specific errors precipitated the crisis. Greece admitted to misstating public accounts while the Irish government guaranteed the debts of the country’s banks, which took huge write-downs on real estate loans.

“It will take many years to get Portugal’s economy back on track even with a bailout, because the aim of such a bailout is to ensure that we repay our debts rather than solve our structural problems,” said Vasco d’Orey, an independent economist.

Among such structural problems are outdated housing regulations that have driven Portuguese to buy rather than rent, as well as rigid labor market rules that have helped push the unemployment rate to 11.2 percent from 4 percent a decade ago.

Portugal’s economy has also remained heavily reliant on state financing, even in public infrastructure works that involved private sector operators.

The guarantees that such private operators have received amount to “keeping a system based on the principle that the state should cover all risks, whatever the costs,” said Duarte Schmidt Lino, a lawyer at PMLJ in Lisbon.

Portugal has recently tried to redirect investment to sectors like renewable energies. But Mr. Nogueira Leite, who is also a board member of Brisa, Portugal’s leading toll-road operator, estimated that, over the past 15 years, “75 percent of credit has been in some way linked to concrete and the building sector, and that is something that needs radical changing.”

Portugal, for instance, has the highest density of highways in Western Europe, he said, “which is clearly unreasonable, to use a mild term.”

Among the rare bright spots is a recent improvement in Portugal’s trade balance, with goods exports rising 15.7 percent in nominal terms last year.

Portuguese companies have also invested heavily in emerging markets, including former colonies like Angola.

An international rescue, however, could heighten protectionist concerns.

Last year, the Portuguese government unsuccessfully tried to block, on grounds of national interest, the sale by Portugal Telecom of its stake in Vivo, a Brazilian wireless business, to Telefónica of Spain.

“The Portuguese companies have debt levels that leave them very vulnerable to acquisitions on the cheap,” said Diogo Ortigão Ramos, a partner at the law firm Cuatrecasas, Gonçalves Pereira.

Mr. Rehn, the European commissioner, argued that privatizations should feature prominently in any Portuguese rescue. The government of Mr. Sócrates already pledged to divest the state of €6 billion in assets by 2013. State holdings range from transport companies like the national railways and TAP, the flagship airline, to financial institutions like Caixa Seguros.

One of the challenges for bailout negotiators will be to determine what proportion of the rescue should be channeled to banks. Analysts estimate that Portuguese banks need €10 billion in fresh capital. As Barclays Capital noted last week, in Portugal — and unlike in Ireland — “banks did not originate this crisis,” having avoided the subprime investments that set off the worldwide financial crisis.

Portuguese banks also did not finance a housing boom like that of Spain, given that Portugal’s economy averaged growth of 1.1 percent in the years before the crisis. Furthermore, domestic public debt represents 3.4 percent of banking assets, compared with an average of 5 percent across the European banking sector, according to research by BPI, a Portuguese bank.

But Portugal’s worsening debt situation and the recent collapse in its credit ratings could spell more trouble for the banks, in a country where corporate indebtedness has reached about 155 percent of G.D.P.

In addition, “this is an environment in which we should expect some capital flight, which will hurt the banks,” said Pedro Santos Guerreiro, editor in chief of Jornal de Negócios, a Portuguese business newspaper.

Since the start of this year, clients have withdrawn €468 million from funds managed by Portuguese investment companies, according to figures released last week by the industry.

Punitive bailout terms could also spur social unrest. José Almada, a 65-year-old retired welder who was attending a weekend rally of the Portuguese Communist Party, said that “workers need to fight against allowing the E.U. to help only their bankers.”

Portugal’s economy was transformed by huge subsidies after it joined the European Union in 1986.

“Nobody questions such benefits, but I also think that we sadly created here an environment where investing and working became less attractive options than relying on subsidies and borrowing,” said Mr. Ramos, the political historian.